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Wednesday, August 26, 2009
The New Age of Minerals Coverage in Texas Title Insurance
Policies
 On August 12, 2009,
the Texas
title insurance industry underwent a significant change. Mike Geeslin, the Texas Department of Insurance
Commissioner, in Commissioner’s Order No. 09-0650, adopted certain amendments
to the Basic Manual of Rules, Rates and
Forms for the Writing of Title Insurance in the State of Texas (Basic
Manual) that address procedural rules, rates and forms relating to mineral
interests. Effective November 1, 2009:
| title companies will be authorized to generally except or exclude
coal, lignite, oil, gas and other minerals from their policies without having to reference the
deeds, leases or other instruments that would otherwise constitute specific exceptions; |
| title companies will be required to issue a new Minerals and
Surface Damage Endorsement, upon request by the insured, if any such general
exception or exclusion of minerals is made; and |
| the cost for a Minerals and Surface Damage Endorsement will be only $50.00. |
Background
The Texas
Department of Insurance (TDI) promulgates various rules, rates and forms for
the Texas
title insurance industry. Among these
rules is Procedural Rule P-5., which (i) permits title companies to make
special exceptions to title coverage only if such exceptions are specifically
described in the policy and (ii) more notably, prohibits title companies from
making any general exceptions to title coverage. However, some title companies routinely
violate this rule by generally excepting to minerals, either by (a) expressly excluding
all minerals from the description of the insured estate (or indicating that the
policy insures the surface estate only) on Schedule A of their policies or (b)
generally excepting as to all minerals on Schedule B of their policies.
A major reason for
the utilization of these tactics by title companies (most notably those located
in mineral producing areas of Texas) stems
from an increase in mineral claims on both residential and non-residential property
due to the discovery of oil and gas in areas like the Barnett Shale in North Texas. Title
companies had issued title policies covering full fee simple title (which
includes both the surface and mineral estates) to the covered real
property. However, these title companies
often did not perform searches for title to the mineral estate to such property
(in large part due to the fact that most title companies’ abstract plants did
not have records dating back as far as the original severance of the minerals
from the surface of many parcels of real property) and, therefore, did not make
any exceptions as to such minerals. When
minerals were discovered over large areas in north Texas, for example, and
mineral owners and lessees began drilling on the property of many surface
owners, numerous claims were made by the surface owners that they were entitled
to coverage under their title policies for the damages to the surface of their
property, since their title policies purported to insure fee simple title to the
property, including the mineral estate, absent any specific exception to the
contrary. Some surface owners went as
far as to claim that they were entitled to the economic value derived from the
minerals under their property. In lieu
of incurring the substantial costs of conducting diligent mineral title searches
for all of their policies, these title companies instead chose thereafter to
generally except or exclude minerals in violation of Procedural Rule P-5.
On April 10, 2008,
in response to multiple complaints filed with the TDI, the Deputy Commissioner
issued Bulletin No. B-0013-08, which reiterated the scope of Procedural Rule
P-5. and notified title companies that making any general exception or
exclusion as to minerals was in violation of this rule. This Bulletin created quite an uproar within
the Texas
title insurance industry, since title companies were apparently caught in an
untenable situation, being forced to choose between a substantial overhaul of
their title examination approach (including the substantial costs associated
with such overhaul) and the repercussions from the TDI for violations of its
rules. Several parties feared that such
costs would eventually be passed on to the consumer in the way of increased
title insurance premiums.
In response to the
issuance of the Bulletin, the Texas Land Title Association (TLTA) and Stewart
Title Guaranty Company requested that the TDI instead consider amending
Procedural Rule P-5. in order to allow a general exception or exclusion to
minerals, provided that a reasonable framework could be put in place to protect
consumers with regard to minerals coverage. After numerous appeals from title companies, the TDI withdrew the
Bulletin and scheduled a public hearing to consider the TLTA’s request. In December 2008, the TLTA’s board of
directors adopted the amendments to the Basic Manual that have now been made by
the Commissioner.
Prior Minerals Coverage
Prior to these
recent changes, consumers could only obtain adequate minerals coverage by one
of two ways: (i) by not having any
exception or exclusion as to minerals at all that did not contain a surface
waiver or (ii) by issuance of a T-19 or T-19.1 Endorsement pursuant to
Procedural Rule P-50.
If a title company
issues a policy without any exception or exclusion as to minerals, then the
insured presumably is fully insured against any damage to the property (up to
the policy limits) caused by the exercise of any mineral rights by third
parties, since a policy covering fee simple title would include any and all
mineral interests thereto. This was the
issue faced by Texas
title companies that originally prompted the general exceptions and exclusions
prior to the recent changes.
However, because
most title companies were cautious regarding their susceptibility to mineral
claims, they would typically include some reference to outstanding mineral
interests, general or otherwise. If a
title company specifically excepted to one or more particular mineral interests,
and assuming that the title company was comfortable enough insuring around such
particular mineral interests, then the insured could only receive minerals
coverage by obtaining a Restrictions, Encroachments, Minerals Endorsement (Form
T-19 for loan policies, formerly known as mortgagee policies; Form T.19.1 for owner
policies). This endorsement was (and still
is) quite costly, however. Pursuant to
Rate Rule R-29., the T-19 costs ten percent (10%) of the Basic Premium Rate for
loan policies; and the T-19.1 costs fifteen percent (15%) of the Basic Premium
Rate for owner policies. This cost was
often a point of contention for purchasers and borrowers, who were typically
responsible for paying for these endorsements. For borrowers seeking financing secured by previously acquired real
property, the cost of the T-19 Endorsement can sometimes be the single greatest
closing cost.
Even more
troublesome than the high cost of the Restrictions, Encroachments, Minerals
Endorsement was that title companies still reserved the right, at the direction
of their underwriters, to delete any insuring provision if they did not
consider the risk acceptable. If the
provision dealing with minerals coverage was deleted, then this costly
endorsement was rendered largely impotent. The final result for many purchasers and borrowers who did not carefully
read their policies was that they ended up paying thousands of dollars for
largely ineffective endorsements.
New Changes to Minerals Coverage
While the specific
amendments to the Basic Manual affect changes to the Texas Title Insurance
Information page, the Procedural Rules, the Rate Rules and the insuring forms,
the following are the practical effects to these amendments:
(1) Limited Permission to Generally
Except/Exclude Minerals. The TDI has
added new Procedural Rule P-5.1. as a limited exception to Procedural Rule
P-5. New Procedural Rule P-5.1. permits
a title company either to expressly exclude any and all minerals from the
insured estate on Schedule A of the policy or to generally except as to all
mineral interests within the list of exceptions on Schedule B of the
policy. However, if the title company
generally excludes or excepts minerals from its policy, then upon request, the
title company must issue a
new T-19.2 or T-19.3 Minerals and Surface Damage Endorsement (discussed
below). Among the recent amendments is
the addition of a new disclosure required on all commitments of title insurance
indicating that, if the title insurer issues the title policy with an exclusion
or exception to the minerals and mineral rights, neither the title policy nor
any endorsements will ensure that the consumer has title to any minerals. However, there is no disclosure requirement
that expressly references the new Minerals and Surface Damage Endorsements. It is important to note that the onus is on
the insured to request the new endorsement. This request may very well become among the most important action items
for those purchasing or obtaining title policies in Texas.
(2) New Minerals and Surface Damage
Endorsement. The TDI has added new
Procedural Rule P-50.1., which describes the scope of coverage under the new
T-19.2 and T-19.3 Minerals and Surface Damage Endorsements. The T-19.2 covers the insured against damage
to present or future improvements on the property (except for lawns, shrubbery
or trees) resulting from the future exercise of any mineral right existing on
the date on which the policy was issued. According to new Procedural Rule P-50.1., the T-19.2 Endorsement applies
to real property improved or intended to be improved for (i) one-to-four family
residential use (if the property is one acre or less) or (ii) office,
industrial, retail, mixed use retail/residential or multifamily purposes
(regardless of size). By contrast, the
T-19.3 Endorsement applies to any other type of real property not otherwise
covered under the T-19.2. For instance,
large ranches may fall within coverage under the T-19.3 Endorsement. One disadvantage to the T-19.3 Endorsement is
that it covers the insured against damage only to present or future permanent
buildings on the property (as opposed to other improvements) resulting from the
future exercise of any mineral right existing on the date on which the policy
was issued. This distinction means that,
if it is unclear whether certain property should be covered by a T-19.2 or a
T-19.3 Endorsement, the party purchasing or obtaining the title policy should
make sure to specifically request a T-19.2 Endorsement.
(3) Affordable Premium for T-19.2/T-19.3;
Cost-Benefit Analysis. The TDI has
added new Rate Rule R-29.1., which sets forth the cost to the insured for
obtaining a T-19.2 or a T-19.3 Endorsement. Because the endorsement is necessary only due to the title company’s
unwillingness to specifically except as to particular mineral interests affecting
the property, it was important that the cost of these endorsements not be as high
as those for the T-19 or the T-19.1 Endorsements. Therefore, new Rate Rule R-29.1. sets the
cost for the Minerals and Surface Damage Endorsements at a mere fifty dollars ($50.00),
effective through December 31, 2011. While this low cost is of obvious benefit to the insured, it now creates
a new dilemma for title companies and their underwriters. Underwriters must now weigh the risks associated
with not diligently reviewing title to minerals. Despite now being able to generally except or
exclude minerals from basic coverage, the minimal cost of the Minerals and
Surface Damage Endorsements creates little upside to this approach if the
insured requests such endorsement. The
end result (and quite possibly a motivating factor behind the adoption of these
amendments) is that title companies may now be prompted to conduct mineral
searches in situations that they previously would not have done so.
These newly
adopted minerals coverage rules, forms and rates, together with Commissioner’s
Order No. 09-0650, can viewed at http://www.tdi.state.tx.us/rules/2009/parules.html
or at the Texas Land Title Association’s website at www.tlta.com.
Conclusion
Overall, these new amendments appear to positively impact both title
companies and their insureds. Title
companies are now able, at their option, to generally except or exclude minerals
from their policies. This practice will
spare them from potential claims for loss of minerals by their insureds, and
they will no longer be required to conduct costly mineral searches in order to
except any sort of mineral interests from their policies. Those purchasing and/or obtaining title
policies will benefit from the lower costs of obtaining full minerals coverage,
both in the cost of the endorsements themselves and in resulting lower legal
fees that were previously expended in the negotiation over minerals
coverage. While these new amendments
definitely create new risks to title companies and to their insureds (for
instance, coverage is capped at the policy limits, so any damages to
improvements in excess of such policy limits caused by the exercise of mineral
rights by third parties will not be covered), these risks appear to be outweighed
by the benefits to all parties involved.
For more
information, please contact David J. Weiner at dweiner@liskow.com or go to www.liskow.com.
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